Understanding Tax-Exempt Status

News that the Internal Revenue Service employees targeted conservative organizations during the 2012 campaign cycle has been topic A here in Washington since the Associated Press reported the story last week. On Friday, Lois Lerner, the IRS official in charge of tax-exempt groups offered an apology. Over the weekend, outraged Republicans called for a full investigation. Today, President Obama said the IRS action was motivated - said if the IRS action was motivated by politics, it would be outrageous.

Stephen Ohlemacher is the AP reporter who broke the story last week. He joins us from his office at the Capitol. Good of you to be with us today.

STEPHEN OHLEMACHER: Thank you for having me.

CONAN: And first, tell us about which - what we know about which kinds of groups were targeted.

OHLEMACHER: Well, what we do know is that this group of revenue agents who screens applications for tax-exempt status had a list of criteria of which groups they were supposed to flag to seek additional information from them. And among this criteria were the words Tea Party, patriots and 9/12 Project, which is a group that was started by a conservative TV personality Glenn Beck.

CONAN: And does anybody know whose idea this was?

OHLEMACHER: Well, what the IRS told us when this first broke on Friday is that this was the work of some low-level, as they call them, line staffers or revenue agents who came up with this idea. Because, see, what was happening at that time is, you know, there are two different kinds of charitable organizations in the United States. There are (c)(3) groups which are purely charitable groups. They cannot conduct any kind of political activity. And there are what they call 501 (c)(4). That's the section of the IRS code that they come under, and they are supposed to be social welfare organizations. And they can't undertake political activity as long as it's not the main focus of what they do.

So when they apply for their tax-exempt status and an IRS agent sees that they engage in political activity, they will pull aside their application and screen it a little further. And what turns out what was happening is that they're sending these groups this really long, thick questionnaires, asking them all kinds of detailed information, and this was a relatively small group who didn't really have any paid staff or anything, it was a big burden for them. And so according to the IRS, you know, their version of events at this point is that, you know, these low-level line workers came up with some short hands and easy ways to flag these political groups, and that's when they came up with the words Tea Party, patriots and 9/12 Project.

CONAN: But it's pretty easy to see if you're a conservative activist that if only conservative groups are being targeted, there was a political motivation here.

OHLEMACHER: Well, that would seem to be so. I mean, in fact, we have a - some time this week, the inspector general for the Treasury Department - the part of the Treasury Department that oversees IRS is supposed to come out with a report. I have a portion of that report ahead of time. And, you know, I went through the - they constructed a really detailed timeline of, you know, what was going on inside the agency. And I don't see any sort of criteria listing anything that would suggest looking at progressive groups.

CONAN: And the timeline you've got is important because as this one official offered his apology last Friday, she said she was only made aware of this when reports emerged in the media. It turns out maybe that's not right.

OHLEMACHER: Well, yes. I mean, that's not exactly what she said to me. I mean, she was very vague to me on exactly when this sort of came to light with her. So I - she did not specifically tell me that she learned about it from mere reports. But what we find in this timeline is that on June 29, 2011, a briefing was held with her and this is when, you know, the criteria was made available to her that they were targeting Tea Party, patriots or 9/11 projects, also groups lobbying to, quote, "make a - America a better place to live." And she was informed that over 100 groups were identified using this criteria at this time. And according to the timeline, she instructed them to change that criteria immediately. So she, evidently, recognized at that time that this was a problem.

CONAN: That's two years ago. Did they, in fact, change the criteria?

OHLEMACHER: Well, according to this timeline, they did. It sort of evolved over time, and then they removed that and they went to sort of a more generic looking for political activity. And then on January 25, 2012, they call this the beyond the lookout list, you know, for when you get an application. The criteria was revised to say, this is a quote, political action type organizations involved in limiting/expanding government, educating on the Constitution and Bill of Rights, social economic reform/movement. And this has raised some other concerns, that they were targeting for additional screening groups that were educating people about the Constitution and the Bill of Rights.

CONAN: And even though she recognized that this was going to be a problem, do we know whether she kicked this further up the chain of command?

OHLEMACHER: Well, according to this timeline that I have, the highest IC that, you know, any top level officials - I think you have to consider where she is in the pecking order of the Internal Revenue Service. You have the commissioner at the top. Beneath them you have several deputy commissioners. Underneath the deputy commissioner is what's called a commissioner of the tax exempt government entities section. She is directly under that person so she is three levels below the commissioner.

There's nothing in this report to suggest that she told the people who are directly above her. There is an entry on August 4, 2011, very early on, that the staff who works under her held a meeting with the chief counsel so that, quote, everyone would have the latest information on the issue. Now, the chief counsel is very high up. The chief counsel is nominated by the president. Now, I've been told that perhaps the chief counsel may not have been the chief counsel herself. It might have been someone in the chief counsel's office. But still, that's a very high ranking person or very high, you know, a person who would have access very high up in the IRS who, you know, evidently chief counsel's office knew about it. It's just not clear how high up in the chief counsel's office it was.

CONAN: Now, I'm approximating - a military equivalent of this major in the IRS was offering an apology. How come we're not hearing from generals at the IRS or indeed the secretary of the Treasury?

OHLEMACHER: Well, we got a statement from a Treasury spokesman on Friday. We have not heard from the Treasury secretary. We have not heard from the acting commissioner of the Internal Revenue Service. The commissioner, during all of this, Douglas Shulman, he stepped down in November. His term was up. IRS commissioners get five-year terms. He was appointed by President George W. Bush, and his term ended, so now we have an acting commissioner. His name is Steven Miller. Turns out he was the deputy commissioner who is directly over Lois Lerner in the tax exempt organization. There is one person in between them, so she's two levels below him, but he oversees that section of the agency.

CONAN: And how - I mean, how much work does this part of the agency do? And do they pick out - you say there was no, necessarily - there was no equivalent for progressive groups to be targeted out, picked out for special attention.

OHLEMACHER: Well, see, you think that was happening between 2010 and 2012. You know, after Citizens United, the Supreme Court case on campaign financing, a lot of these, quote, social welfare groups began to spring up and do a lot of political activity, a lot of political work. And in fact, Miss Lerner told us that the number of exempt groups under this designation more than doubled to over 3,400 in a two-year period. So they were getting swamped with all kinds of applications to grant tax exempt status.

Now, one of the things that the IRS have been very careful to point out is that you can designate yourself a social welfare organization, a tax-exempt group. You do not have to apply to the IRS. However, it's nice to have that IRS designation in case someone wants to make a contribution to your group. You can assure them that you are, in fact, tax-exempt. So they got all these applications coming in, and they were scrambling, you know, according to her at that time, they were scrambling to come up with a criteria because these groups, so many of them, were involved in political activities, meaning, think of the two - I just - like one conservative, one progressive group, you know, GPS Crossroads, the group that was started by Karl Rove. That is a (501)(c)(4) group; on the liberal side, MoveOn.org is also.

So you know, these groups are clearly, you know, associated with a lot of political activity. However, under the rules, under the law, you know, that cannot be their primary purpose. So it's up to the IRS to determine whether their political activity, advocating for or against the election of a person or the outcome of an election, is their primary purpose.

CONAN: So the implication then is that, the explanation from the IRS is they were overwhelmed and this is a shortcut to help them reduce their workload.

OHLEMACHER: Well, yeah, I mean I don't know if I'd call it a shortcut. I mean, what they said they did was that they centralized - that's the big word that they use - centralized the screening of these applications, as Miss Lerner told us, to take advantage of people's expertise and to create consistency in the reviews. So they centralized the screening in an office in Cincinnati, Ohio, in an effort to do that. And it was among the agents in this office, she said, that came up with the shortcut for flagging these groups.

CONAN: And even if we accept that their motives were not political, clearly she was alert to the idea initially, a couple of years ago, that this might be a problem.

OHLEMACHER: Well, yes. In fact, Congress started inquiring about this as early as June of 2011, and it really came to a head back in 2012 during the election. There are a lot of members of the Congress, mostly Republicans, who were hearing from, you know, conservative groups in their districts, constituents saying, look, we're getting harassed by the Internal Revenue Services. They're asking us for our list of donors, which is really highly unusual and, Miss Lerner acknowledged, violates IRS policy in most cases. There are some situations where they may have to ask for a group's list of donors. But typically they do not do that.

CONAN: Now, some of these groups have threatened to sue the IRS.

OHLEMACHER: Yes, they have, and we'll have to see how that goes. I mean I think it's important also to note that she said - so they set aside for special review about 300 of these groups that were engaged in political activity and they screened their applications further to see if they qualify for tax-exempt status. She says that they have gone through about 150 cases. And of those 150 cases, some of them withdrew their applications, but all the rest were approved. So no one has actually had their tax-exempt status revoked because of this.

CONAN: So a lawyer for the IRS would argue that they haven't been harmed. A lawyer for the group might say, wait a minute, we had to go through an awful lot of trouble and expense to meet these unreasonable and indeed illegal demands.

OHLEMACHER: Sure. Sure. I meant I don't know if illegal, but they did say, you know, I guess that would be something they'll decide. But, yeah, certainly the IRS has acknowledged their inappropriate demands.

CONAN: We're talking with Stephen Ohlemacher, a reporter for the Associated Press, who covers the IRS. He is at his office on Capitol Hill. You're talking - you're listening to TALK OF THE NATION from NPR News. And where does this go next? There's that - you've seen a portion of this auditor's report. There's more to come?

OHLEMACHER: Yes, there is. In fact, I've seen two appendixes of it, the full report. We expect it to be out later this week in conjunction with a hearing held by the House Ways and Means Committee. The chairman of the committee, Representative Dave Camp, has announced that he is going to be holding a hearing. It's not clear exactly what day. They're still working on it. It might be later this week. It might get pushed into next week. But yes, so there's going to hearings on the Hill.

Several committees have already announced investigations. The House Oversight Committee has announced an investigation. Ways and Means is investigating. And just today, the Senate Finance Committee has announced that it is investigating, and also, I should say the Permanent Investigation Subcommittee in the Senate is also looking into it.

CONAN: And what's the status of these agents in the Cincinnati field office who initiated and conducted these investigations?

OHLEMACHER: The IRS will not tell us at this time.

CONAN: And what's the status of Ms. Lerner, who is their boss?

OHLEMACHER: Well, she was working on Friday and they haven't given us any indication of anything changing. I was at the American Bar Association conference in which she spoke. And she was working then, and so I - as of right now I have not been given any information otherwise.

CONAN: Now, she was at that bar association conference and that's where the apology was issued, apparently in response to a question. But some people suggesting she was just trying to get out in front of this report.

OHLEMACHER: Well, that is what Chairman Darrell Issa, who's the chairman of the House Oversight Committee, said, that, you know, he said it was blatant - he said it was apparent that she was trying to get out ahead of this inspector general's report. The inspector general started investigating this a year ago or almost a year ago, last summer. And obviously the IRS has seen the report. It's very common. In fact, it's standard procedure for when an inspector general conducts an audit or an investigation of an agency, they share the report with the agency.

The agency gets a chance to respond. That response is made of the report and they also might make some revisions based on the response from the agency. So the IRS clearly knew that this report is coming out. They know everything that's in this report.

CONAN: And this is a report, though, that is trying to find out what happened and why. It is not trying to assign necessarily blame or certainly not criminal blame.

OHLEMACHER: No, what the IG's reports typically do is they will list -they will find some problems. They will find some areas that they believe need to be addressed and they will make recommendations to the agency for how to fix what they consider to be problems. That does not include - typically, this would not be something that would refer something to, say, the criminal authorities or anything like that.

CONAN: And with this report, since the IRS saw it, they're part of the administration, would the White House have seen it?

OHLEMACHER: Well, here's what's interesting is that the president said today that the first he heard of this issue was on Friday from news reports. The White House has been saying that all along, so I don't know. But if they had seen it, then you would think that they would've known about it before Friday.

CONAN: And in, well, and who knows how long before Friday?

OHLEMACHER: Yes. I wouldn't know.

CONAN: Nobody does at this point. But I suspect people are going to be asking questions about who knew what and when.

OHLEMACHER: Oh, that's very clear. Yes, that's going to be a big question. In fact, you know, some of the issues that come up is if you look at these responses, I've been gathering up letters that members of Congress have been writing to Congress over the last two years and the responses from the Internal Revenue Service. You know, they're asked very detailed questions. You know, the members of Congress are, you know, concerned because they're hearing from their constituents, they're being targeted. The constituents saying they're being harassed by the IRS.

You know, they're asking all these questions and all of these responses, very long, detailed - painstakingly detailed responses about how this process works. None of it mentioning anything about people being targeted because of their political views. And I would add that many of the responses that came back from the agency were written by a deputy commissioner at the time, Steven Miller, who is now the acting head of the entire agency.

CONAN: And he was, again, Ms. Lerner's boss.

OHLEMACHER: Yes, he was.

CONAN: So the next - we expect the rest of this report to come out later this week. Is there any indication that any of this is going to be referred to the Justice Department?

OHLEMACHER: Not at this time. I guess we'll just have to see what's in the rest of the report and how folks react. There have been a lot of calls in Congress to the White House to initiate an investigation. I haven't heard a whole lot of talk about the Justice Department. The White House has said - has taken a hands-off approach to that and said, you know, we're going to wait and see what the inspector general says.

CONAN: Stephen Ohlemacher, thanks very much and congratulations.

OHLEMACHER: All right. Well, thank you very much for having me.

CONAN: Stephen Ohlemacher, a reporter for the Associated Press. His story last Friday brought this to national attention. He covers the IRS, spoke with us from his office at the Capitol. This is TALK OF THE NATION from NPR News. I'm Neal Conan in Washington. Transcript provided by NPR, Copyright NPR.